How to pick best shares: Top tips presented at Craig's investor day

What are the most important factors in picking the best shares? Photo / supplied

Is it dividends, cash flow or asset quality? Should a strong balance sheet be the focus or growth potential? And how important is leadership compared with debt?

These were some issues canvassed in a list of the 11 characteristics of the best stocks to invest in, handed out last week at an Auckland investment conference.

Craigs Investment Partners held its annual investor day at the Cordis, inviting business leaders to speak about what they're doing and how their companies are going.

The lineup included Mainfreight managing director Don Braid, Fisher & Paykel Healthcare managing director Lewis Gradon, Fletcher Building chief financial officer Bevan McKenzie, and Goodman Property chief executive John Dakin, Sky TV chief executive Sophie Moloney, Craig's head of private wealth and research Mark Lister and Serko chief executive Darrin Grafton.

Craigs said we all had our favourite signposts for what makes a good investment but its checklist also named stocks to avoid, saying the business doesn't buy shares that don't meet the criteria listed in its report.

Companies that have a record of disappointing the market are treated warily. Those that face the risk of more regulation also warrant care, Craigs warned.

Its list of the 11 most important factors is:

1. Sustainable growing dividend - a strong income focus is a key metric and those that pay attractive dividends and have the potential to grow are important.

2. Strong financial position - lower debt levels are preferred. Excessive debt leaves a company vulnerable to an economic downturn.

3. Competitive advantages - a distinct and defendable advantage is important and bigger companies often have the scale and financial strength over smaller competitors.

4. Leadership - tough to measure but the quality and experience of management and board is a key.

5. Quality assets - especially relevant for infrastructure and real estate businesses.

6. Growth potential - no point in buying into a business which has no growth potential. This is a must-have.

7. Cash flow generation - a company's lifeblood.

8. Quality and defensiveness - a portfolio's core should be made up of defensive, high-quality stocks.

9. Reasonable valuation - "none of the above matters if a company is trading on an excessive valuation".

10. Portfolio fit - your investment should add another layer of diversification, be involved in a different sector or provide exposure to a new geography, currency or market.

11. Sustainability characteristics - environmental factors affecting how the business operates and its longer-term future.

Craigs also warned of nine factors to look out for or avoid.

Falling margins, a record of disappointing the market, excessive debt, high regulatory risk, excessive valuations, excessive payout ratio, limited growth, lack of scale and sustainability concerns were on its list of problems or red flags which should act as a warning to investors.

Craig's investment book for those who attended yesterday also had two-page profiles of some of the larger NZX companies: Fletcher Building, Serko, Mainfreight,Sky TV, Fisher & Paykel Healthcare, Goodman Property Trust and Meridian Energy.

Craigs said its investment philosophy was to concentrate on core elements. Those were a focus on quality on all asset classes, building a portfolio that generated income today and growth over time and a conservative approach to risk management.

A recognition of the importance of careful and broad diversification was the fourth pillar in its investment philosophy, it said.

Inflation protection should be a key objective in these times. A portfolio's dividend income stream and capital value should grow at a rate at least in line with inflation, if possible.